General Mills' CEO Discusses Q3 2012 Results - Earnings Call Transcript

General Mills (GIS)

Q3 2012 Earnings Call

March 21, 2012 8:30 am ET

Executives

Kristen Smith Wenker - Vice President of Investor Relations

Donal Leo Mulligan - Chief Financial Officer and Executive Vice President

John T. Machuzick - Senior Vice President and President of General Mills Bakeries & Foodservice Division

Kendall J. Powell - Chairman and Chief Executive Officer

Analysts

Edward Aaron - RBC Capital Markets, LLC, Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Andrew Lazar - Barclays Capital, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

David Palmer - UBS Investment Bank, Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

Jason English - Goldman Sachs Group Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the General Mills Fiscal 2012 Third Quarter Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, March 21, 2012. I would now like to turn the conference over to Kris Wenker, Vice President of Investor Relations. Please go ahead.

Kristen Smith Wenker

Thanks, operator. Good morning, everybody. I'm here with Don Mulligan, our CFO; John Machuzick, Senior Vice President and Head of our Bakeries and Foodservice business; and Ken Powell, our Chairman and CEO. I'll turn the call over to them in just a minute. First, I'm going to cover my usual housekeeping item.

Our press release on third quarter results was issued over the wire services earlier this morning. It's also posted on our website if you still need a copy. We've got slides out on the website, too, that supplement today's prepared remarks. And these remarks will include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists factors that could cause our future results to be different than our current estimates.

And with all of that, I'll turn you over to my colleagues, beginning with Don.

Donal Leo Mulligan

Thanks, Kris, and hello, everyone. Thanks for joining us this morning. As you see from our press release, third quarter performance was consistent with the guidelines we provided on February 17. We delivered sales growth in each of our 3 operating segments with strong net price realization across our base business and good contributions from the international Yoplait business acquired last July. The quarter also includes strong contributions from new products and an 8% increase in advertising investment. Earnings were generally in line with year-ago levels due to this year's significant input cost pressure.

Slide 5 summarizes our results for the quarter. Sales totaled $4.1 billion, up 13%. Segment operating profit increased 1%. Net earnings attributable to General Mills totaled $392 million and diluted earnings per share were $0.58 as reported. These results include changes in the mark-to-market valuation of certain commodity positions as well as integration expenses from the international Yoplait acquisition. Excluding these items, adjusted diluted earnings per share totaled $0.55 for the quarter, $0.01 below year-ago results.

Slide 6 shows the components of our net sales growth. On an as-reported basis, including Yoplait International, net sales increased 13%. Pound volume contributed 10 percentage points of growth in the quarter, and net price realization and mix added 3 points of sales growth. Foreign exchange did not have a material effect on sales growth rate this quarter. Excluding the Yoplait acquisition, net sales grew 5% and expected pound volume was lower in the quarter, down 3 percentage points. Price and mix contributed 8 points of sales growth.

As I mentioned a moment ago, all 3 of our business segments contributed to this quarter's sales increase. U.S. Retail net sales grew 4%. International sales were up 51%, led by international Yoplait acquisition. But excluding Yoplait, International sales still increased at a high single-digit rate and net sales for our Bakeries and Foodservice segment rose 6%.

Slide 8 outlines our third quarter gross margin performance. On a reported basis, gross margins declined to 36.6%. This includes the impact of mark-to-market changes in the value of our grain inventories and commodity hedges we'll use in future periods. Excluding mark-to-market effects, our gross margins declined 280 basis points in the quarter. The addition of Yoplait International to our business mix accounts for roughly 1/3 of that decline. The remainder reflects margin contraction for our base business, primarily due to higher input costs and lower U.S. Retail volumes. Looking at the full year, our original plans for 2011 assumed a 100 basis point contraction in gross margin for the base business with the addition of Yoplait International further reducing gross margin this year. We currently expect fiscal 2012 gross margins will be, in total, roughly 250 basis points below the prior year excluding mark-to-market effects in both periods.

Slide 9 summarizes our segment operating profit in the quarter. U.S. Retail profit declined 4% reflecting higher input costs, lower volume and increased media investment. International profit increased 40% led by strong contributions from Yoplait. And Bakeries and Foodservice profit matched year-ago levels despite sharply higher input costs and a difficult comparison to strong grain merchandising earnings a year ago. In total, segment operating profit rose 1% to reach $675 million. After-tax earnings from joint ventures rose sharply in the quarter. Good net sales growth and the lapping of the tax restructuring charges, Cereal Partners Worldwide last year contributed to the earnings increase. On a constant-currency basis, CPW sales were up 7% led by growth from the Nesquik and Chocapic brands. Constant-currency sales for Häagen-Dazs Japan increased 3%.

In the fourth quarter, we expect joint venture profits will fall below stronger year-ago levels. And for the full year, we now expect after-tax earnings from joint ventures will be down from 2011 levels. Earnings for Häagen-Dazs Japan will be below year-ago levels due to the difficult economic environment in Japan following the earthquake and tsunami a year ago. That being said, recovery for this business is running a bit ahead of our plan. CPW earnings will also be below year-ago levels due to a one-time adjustment to tax reserve related to prior years and earlier phasing of expenses for new manufacturing capacity in emerging markets, including Malaysia, Turkey, South Africa and Brazil. CPW volume and sales growth in the underlying business remains strong.

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